SELF EMPLOYMENT AND LLC

[TAXMAN]

I have a 2 member (husband and wife) LLC filing on a 1065 Form. H takes a reasonable salary wife does not. Husband takes distributions wife does not. It this distribution subject to SE Tax? I find some statements says is and some not clear. I appreciate all help in this matter. Many Thanks

[mcb39]

Yes, it is subject to SE tax as well as a percentage of the remaining profit; and the wife is subject to SE tax on the rest of the profit.

That is, if she is an active partner.

[Lion EA]

Do you mean Guaranteed Payment?

[TAXMAN]

There is no Guaranteed Payment. Husband took a salary and then took didtributions. Cash out of the account indicates this is what happened.

[Jack from Ohio]

Correct me if I am wrong, but Partnership partners can only take guaranteed payments and any distributions of profit are subject to SE on the personal retrun as well. All transferred via the K-1.

So all income from the partnership is taxed as income and subject to SE.

[jainen]

>>H takes a reasonable salary<<

In my opinion, that isn't reasonable for a partnership. One problem is that, while a partner's salary (better known as guaranteed payments) is deductible, payroll taxes on guaranteed payments are not deductible and should be added to the guaranteed payments subject to SE tax. Aw, it's probably not enough to make a difference unless they are doing something special with fringe benefits. Do you know why they don't use normal accounting in the matter?

[kcjenkins]

There should be no 'salary' to a partner. No W-2, just GP on the K1.

[Lion EA]

The wife's percentage of the profits will appear on her K-1 whether she leaves her profits in the partnership or takes distributions. The husband's GP as well as his percentage of the profits will appear on his K-1 on two different (or more, depending on the types of income) lines.

[mcb39]

The original poster did not state whether this "reasonable salary" had taxes withheld and was reported on a W2. That would be incorrect, but I have seen it done. However, all profits from a Partnership are taxed to the partners in some way or another. They flow through to to partners on the K1 and if the partner is active, he also pays SE tax on it. All of the posters are correct, but everyone says it in a different way and there is info missing from the original post.

If the wife is an active partner, her share of the profits are taxable and subject to SE. Another question, are they equal partners, or what is the setup here.

[OldJack]

There should be no 'salary' to a partner. No W-2, just GP on the K1.

I have to disagree on no salary to a partner. There are cases where salary is clearly appropriate such as the court cases of a partner that is also a professional (such as a doctor, lawyer, etc) and providing professional services to the partnership. Although IRS publications indicate no salary I don't believe there is any law against a partner taking salary and the partnership deducting any related payroll tax.

[kcjenkins]

Yes, I know there have been a few cases where special circumstances led to the court accepting the treatment as salary', but the circumstances did not seem to indicate such is the case here. Given the lack of detail, I would not assume the most extreme situation..

[Gail in Virginia]

And while income to partners is taxable regardless of whether or not distributed, nothing has been said about what type of income this partnership makes which would affect whether or not it is also subject to self employment tax unless I overlooked that in the post. If it is all rental income, and the husband takes a "salary" for managing the properties, the other income might not be subject to SE. Facts and circumstances.

[TAXMAN]

I really didn't mean to stir up a can of worms. It is a H & W LLC providing security services. Only H works and gets a W-2. All taxes withheld on that part. This is his main employment. LLC started 2005 and I cannot find where an election was ever made and in fact 1065 has always been filed and as best I can see his income was always on a w-2 and subtracted from the gross on the 1065. What to do???

[OldJack]

>>What to do???<<

Nothing to do if he reported his 1065-W2 income plus his 1065-k1 income.

[mcb39]

I agree with Jack. And, I don't believe there is a law against it either. The end result is pretty much the same and the IRS receives the tax owed in either case.

One does have to wonder why it was set up on a 1065 if the wife contributes nothing to the Partnership. A case of more paperwork and more income for the original preparer? Could have been a sole proprietor LLC.

[Jack from Ohio]

Probably advice from his barber and his plumber.